Saturday, January 30, 2016

The Fed's Rate Hike Was A Bit of an Outlier

Contra the IBD headline, I think the mistake was keeping rates too low for too long.
So, if the Fed is going to have any maneuvering room on rates before going negative during the next recession, raising them sooner is better than later, or never.

From Investors Business Daily:

The Fed’s Historic Rate-Hike Mistake — In One Chart

Janet Yellen’s Federal Reserve has done something that no other Fed
has done since Paul Volcker aimed to quash runaway inflation in the
early 1980s, even if it meant a recession — and it did.

New Commerce Department data out Friday show that nominal GDP grew at
a 1.5% annualized rate in the fourth quarter, casting further doubt on
the Fed’s decision to begin hiking its key interest rate in December.
(Inflation-adjusted GDP rose just 0.7% in Q4.)

With
the exception of Volcker’s interest-rate hike in early 1982 amid a
recession, no other Fed has raised rates during a quarter in which
nominal GDP grew less than 3%, dating back to the early 1970s.

In fact, a rate hike when nominal GDP is growing less than 4% is
extremely rare. From 1983 to 2014, it only happened twice, and one of
those times (the second quarter of 1986), the Fed cut rates by a half-point before retracting 1/8th of a point of the reduction.

That makes the first quarter of 1995, when nominal GDP grew 3.7%, the
only time since Volcker that the Fed had, on net, raised rates in a
quarter when nominal growth was running below 4%. After that early 1995
hike, it should be noted, the Fed proceeded to cut rates three times
before the next rate hike in early 1997....MORE